SHYAM SUNDER AGARWAL versus P. NAROTHAM RAO AND ORS. on 23 July 2018

[2018] 7 S.C.R. 1135

SHYAM SUNDER AGARWAL

v.

P. NAROTHAM RAO AND ORS.

(Civil Appeal No. 6872 of 2018)

JULY 23, 2018

[R. F. NARIMAN AND INDU MALHOTRA, JJ.]

Arbitration and Conciliation Act, 1996 – Memorandum ofUnderstanding (MoU)/Agreement executed between the parties forsale and purchase of shares of a Company – Issue as to whetherClause 12 of the said Agreement can be stated to be an arbitrationclause – Held: On reading of various clauses it is clear that twopersons though, styled as Mediators/Arbitrators, are escrow agentswho were appointed to keep certain vital documents in escrow, andto ensure a successful completion of the transaction contained inthe MOU – The very fact that they were referred to as “Mediators/Arbitrators” and as “Mediators and Arbitrators” would show thatthe language used is loose – The idea really was that the two namedpersons do all things necessary during the implementation of thetransaction between the parties to see that the transaction getssuccessfully completed – Clause 8 makes it clear that the idea wasto prevent disputes from occurring and to ensure smoothimplementation of the Agreement – Object was not to adjudicatedisputes but to prevent them – Clause 12 has to be read in the lightof Clauses 8 and 11 of the MOU, and therefore, the expression“decision” used in Clause 12 is only a pro tem decision, namely,that the two escrow agents were to make decisions only during theperiod of the transaction and not thereafter – They were “functusofficio” after the transaction got completed – Wording of theAgreement, is clearly inconsistent with the view that the Agreementintended that disputes be decided by arbitration – Further, indeed,three of the four purchasers of shares did not read Clause 12 as anarbitration clause, but approached the Civil Court instead –Discretionary jurisdiction u/Art.136 not exercised – Constitution ofIndia – Art.136.

Disposing of the appeal, the Court

HELD: 1.1 On a conspectus of reading of Clauses 6, 8, 10,11 and 12 it emerges that Mr. SR and Mr. GPR, though styled as

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AMediators/Arbitrators, were without doubt escrow agents whowere appointed to keep certain vital documents in escrow, andto ensure a successful completion of the transaction contained inthe MOU. Indeed, the very fact that they were referred to as“Mediators/Arbitrators” and as “Mediators and Arbitrators”would show that the language used was loose – the idea reallyBwas that the two named persons do all things necessary duringthe implementation of the transaction between the parties to seethat the transaction gets successfully completed. Clause 8expressly declared and confirmed “that for successful completionof this transaction in order to avoid any further unforeseenClitigations”, the two escrow agents were appointed. Clause 11further made it clear that these two gentlemen were escrowagents but shall not handover certain documents till the totaltransaction is satisfactorily completed. Clause 12 has to be readin the light of these Clauses of the MOU, and that, therefore, the

expression “decision” used in Clause 12 is only a pro tem decisionD– namely, that the two escrow agents were to make decisionsonly during the period of the transaction and not thereafter. Theywere “functus officio” after the transaction got completed.Further, the “breaches” that were referred to in Clause 12 refer,inter alia, to an undertaking given by the party of the first partEwhich was contained in Clause 10, which, if breached, the escrowagents have necessarily to decide on before going ahead withthe transaction. Therefore, when viewed as a whole, it is clearthat the two escrow agents were not persons who were to decidedisputes that may arise between the parties, whether before orafter the transaction is completed, after hearing the parties andFobserving the principles of natural justice, in order to arrive attheir decision. A reading of the MOU as a whole leaves no mannerof doubt that the said MOU only invests the two gentlemen namedtherein with powers as escrow agents to smoothly implementthe transaction mentioned in the MOU and not even remotely toGdecide the disputes between the parties as Arbitrators. [Paras 9,10] [1142-H; 1143-A-F]

1.2 In the present case, it is clear that the wording of theAgreement was clearly inconsistent with the view that theAgreement intended that disputes be decided by arbitration.HIndeed, three of the four purchasers did not read Clause 12 as an arbitration clause, but approached the Civil Court instead,strengthening the conclusion that the subsequent conduct of theparties to the Agreement also showed that they understood thatClause 12 was not an arbitration clause in the Agreement. Clause8 of the MOU made it clear that the idea was to prevent disputesfrom occurring and to ensure smooth implementation of theAgreement, thereby making it clear that the object was not toadjudicate disputes but to prevent them.[Paras 11, 12][1145-C, E]

1.3 The conduct of the appellant leaves much to be desired.Having issued a notice for arbitration way-back on 24.05.2007,there was no reason whatsoever to delay a Section 11, Arbitrationand Conciliation Act, 1996 application for a period of two and ahalf years until December, 2009. The appellant knew that Clause12 could not possibly be construed as an arbitration clause, yetsomehow sought to delay the proceedings not joining his brethrenin the civil suit that was filed by them. Equally, his conduct duringthe pendency of the Section 11 petition leaves a lot to be desired.Even before judgment was pronounced in the Section 11 petitionon 22.07.2011, the Appellant approached another forum, namely,the Company Law Board on 16.06.2011, for reliefs based uponthe MOU. He, thereafter, continued with the Company Petitionwhich would have led this Court to believe that he was abandoningany further recourse against the judgment dated 22.07.2011, butthen on second thoughts, filed a Special Leave Petition with adelay of 358 days against the judgment rejecting his Section 11petition on 22.07.2011. During the pendency of the Special LeavePetition as well, his conduct leaves much to be desired. On24.01.2017, he asked that his petition that was filed before theCompany Law Board be withdrawn not with the liberty to pursuearbitration, as one would have expected, but with the liberty tofile a fresh company petition on the same set of facts. Thus, apartfrom decision on merits, discretionary jurisdiction under Article136 of the Constitution also not exercised. [Para 13] [1145-F-H;1146-A-B]

Bihar State Mineral Development Corporation v. EnconBuilders (I) (P) Limited (2003) 7 SCC 418 : [2003] 2Suppl. SCR 812 – relied on.

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AP. Dasaratharama Reddy Complex v. Government ofKarnataka and Another (2014) 2 SCC 201 : [2013] 14SCR 579 ;K.K. Modi v. K.N. Modi (1998) 3 SCC573 : [1998] 1 SCR 601 ; State of U.P. v. Tipper Chand(1980) 2 SCC 341 – referred to.

From the Judgment and Order dated 22.07.2011 of the High Courtof Judicature, Andhra Pradesh at Hyderabad in Arbitration ApplicationDNo. 112 of 2009.

Guru Krishnakumar, Amit Sibal, Sr. Advs., M. Srinivas R. Rao,Abid Ali Beeran P., Mrs. Sudha Gupta, D. Bharat Kumar, Nitish Bandari,Tadimalla Bhaskar Gowtham, Aman Shukla, Sayooj Mohandas M., AbhijitSengupta, Rana S. Biswas, Sunil Kr. Sharma, Ms. Sharmila Upadhyay,ET. Srinivasa Murthy, Senthil Jagadeesan, Ms. Suriti Chowdhary,K.S. Mahadevan, Krishna Kumar R.S, Ms. Swati Bansal, Rajesh Kumar,Advs. for the appearing parties.

The Judgment of the Court was delivered by FR. F. NARIMAN, J. 1. Leave granted.

2. The present dispute arises out of a Memorandum ofUnderstanding (MoU)/Agreement executed between the parties dated08.12.2005 for sale and purchase of shares of a Company called M/sMancherial Cement Company Private Limited of which all the partiesGare Directors. The bone of contention in the present proceedings is asto whether Clause 12 of the said Agreement can be stated to be anarbitration clause.

3. Heard the learned Senior Counsel appearing for the parties atconsiderable length.

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4. Mr. Guru Krishnakumar, learned Senior Advocate, appearingon behalf of the Appellant has brought to our notice the said MOU inwhich he relies, in particular, upon Clause 12. According to him, thelanguage of the said clause is language that leads inevitably to theconclusion that the said clause is an arbitration agreement. The word“decision” is used; the word “Mediators/Arbitrators” is used; theexpression “any breaches” is used; and the “decision” is to be final andbinding on all parties to the said Agreement. Based on these words, inparticular, the learned Senior Advocate argues that the three essentialsof an arbitration clause have been met, namely, that there must be disputesbetween the parties which have to be adjudicated upon by giving theparties a hearing, at the end of which there is a decision which is finaland binding between the parties. He also argued that the MOU read asa whole would not militate against his argument given the words used inClause 12.

5 The learned Senior Advocate then relied upon a judgment ofthis Court in P. Dasaratharama Reddy Complex vs. Government ofKarnataka and Another, (2014) 2 SCC 201, and distinguished judgmentscited therein by stating that in the arbitration clause that was consideredin that case, it was clear that clauses of earlier judgments of this Courteither spoke of a preliminary decision which was then subject to a finaldecision by a Court or spoke of decisions that had to be rendered only“for the time being”. According to him, his case was entirely different,and therefore, he would squarely fall within the parameters laid down bythe judgment in K.K. Modi vs. K.N. Modi, (1998) 3 SCC 573.

6. Mr. Amit Sibal, learned Senior Advocate on behalf of theRespondent Nos. 1 to 4, is at pains to point out that the MOU, read as awhole, makes it clear that the expression “Mediators/Arbitrators” is usedloosely. In fact, the two gentlemen said to be arbitrators, Mr. K. SudhakarRao and Mr. Gone Prakash Rao, are escrow agents who have withthem the custody of three sets of documents to ensure successfulimplementation of the MOU. He relied strongly upon Clauses 6, 8, 10and 11 and stated that these must be read along with Clause 12 so that itis clear that the expression “decision” must be read only with “duringthe period of entire transaction” and has reference to breaches that mayoccur under Clause 10, as parties of the first part undertake to substitutepersonal guarantees given by parties of the second part with personalguarantees of their associates, and that if this is not done, then a “decision”is to be taken by the escrow agents as to what to do next.

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A7. Mr. Sibal also pointed out that three other purchasers of shares,who were sailing in the same boat as the present Appellant, had gone tothe Civil Court and had filed O.S. No. 241 of 2017, which has since beendismissed in default. He also points out that the entire exercise beforeus is a mala fide exercise by the Appellant to hedge his bets by firstissuing a notice in 2007 under the said MOU as if the said MOU containedBan arbitration clause, but following it up only two and a half years laterby filing a Section 11 petition in December 2009. He also stated thatwhile the Section 11 petition was pending, the Appellant had filed aCompany Petition No. 49 of 2011 on 16.06.2011 in which he asked forreliefs that flow directly out of the said MOU. This Company PetitionCwas again withdrawn by him on 24.01.2017 in order to file a freshCompany Petition on the same set of facts, thereby showing or indicatingwillingness to continue with the remedy in company law as against theremedy in arbitration. He also pointed out to us that his own clients hadgone in a Company Petition to the Company Law Board, and hadsucceeded in the Company Petition by getting the necessary reliefs onD16.03.2016 as the Appellant was in no mood, from the very beginning, toimplement the terms of the MOU. We are told that an appeal is pendingbefore the High Court, having been filed by the Appellant against theaforesaid order. He also argued that he was seriously prejudiced by thefact that the Appellant continues to hedge his bets and, in fact, filed aESpecial Leave Petition against the impugned order, belatedly, with a delayof 358 days. According to Mr. Sibal, therefore, not only is it clear thatthe MOU does not contain any arbitration clause but equally, given ourdiscretionary jurisdiction under Article 136, we ought not interfere in thefacts of this case.F8. Having heard the learned Senior Counsel for the parties, it isnecessary to first set out some of the clauses of the MOU executedbetween the parties. Clause 3 declares that the parties have reached asettlement, as a result of which certain shares have to be sold in theCompany, so that the internal disputes within the Company may end, inorder that the Company purchase certain assets of yet another Company.GEqually, Clauses 6, 8, 10, 11 and 12 are of importance and are set outherein below:- “6. The parties of 1[st] part hereby handed over 9 cheques favouringSri P. Narotham Rao as detailed below to Sri K. Sudhakar RaoS/o Late Sri K. Madhava Rao, R/o Plot No.7, UBI Colony, Road H

SHYAM SUNDER AGARWAL v. P. NAROTHAM RAOAND ORS. [R. F. NARIMAN, J.]

No.3, Banjara Hills, Hyderabad and Sri Gone Prakash Rao S/oGone Chalapathi Rao R/o Transport Guest House, Tarnaka,Hyderabad Mediators/Arbitrators.

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Particulars of ChequeAmountDate Ch. No. Bank & Branch Holder BName 09.12.2005450547 Andhra Bank, St. John’s EM Rs.25,00,000/- High School Branch, Karimnagar of S. Hareender Rao C09.01.2006450543 Andhra Bank, St. John’s EM Rs.78,12,500/- High School Branch, Karimnagar of S. Hareender Rao 09.01.2006450444 HDFC Bank, Himayathnagar Rs.78,12,500/- Branch, Hyderabad of Shyam DSunder Agarwal 09.02.2006450544 Andhra Bank, St. John’s EM Rs.78,12,500/- High School Branch, Karimnagar of S. Hareender Rao E09.02.2006450445 HDFC Bank, Himayathnagar Rs.78,12,500/- Branch, Hyderabad of Shyam Sunder Agarwal 09.03.2006450545Andhra Bank, St. John’s EM Rs.78,12,500/-High School Branch, Karimnagar of S. Hareender FRao 09.04.2006450546 Andhra Bank, St. John’s EM Rs.78,12,500/- High School Branch, Karimnagar of S. Hareender Rao G09.04.2006450447 HDFC Bank, Himayathnagar Rs.78,12,500/- Branch, Hyderabad of Shyam Sunder Agarwal xxx xxx xxx

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8. The parties hereinabove declare and confirm that for successfulcompletion of this transaction in order to avoid any furtherunforeseen litigations, both the parties hereby mutually appointedSri K. Sudhakar Rao S/o Sri Late Sri K. Madhava Rao, R/o PlotNo.7, UBI Colony Road No.3, Banjara Hills, Hyderabad and SriGone Prakash Rao S/o Gone Chalapathi Rao R/o Transport GuestHouse, Tarnaka, Hyderabad as mediators and arbitrators to whomthe above cheques as well as all other following documents arehanded over and the same will be under their custody tillsatisfactory completion of the entire transaction as per the termsand conditions contained herein.

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a) Above referred 9 cheques

b) The share certificates along with the duly signed transferdeeds pertaining to 22,40,000 equity shares of parties of 2[nd] partand their associates.

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10. The parties of 1[st] part further agree and undertake to substitutethe personal guarantees given by the parties of 2[nd] part with thepersonal guarantors of their associates with M/s Andhra Bankwithin two months from the date of this document.

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11. Till the total transaction is satisfactorily completed and till entiresale consideration is paid and till the personal guarantees of partiesof 2[nd] part are substituted by the personal guarantees of theAssociates of parties of First Part with M/s Andhra Bank, theabove named Arbitrators/Mediators shall not hand over the sharecertificate with duly signed share transfer deeds in respect of theshares of the parties of 2[nd] part to the parties of 1[st] part.

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12. It is further agreed that any decision to be taken by saidMediators/Arbitrators during the period of entire transaction inthe event of any breaches committed by either of the parties shallbe final and binding on all the parties hereinabove.”

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9. What emerges on a conspectus of reading of these clauses isthat Mr. Sudhakar Rao and Mr. Gone Prakash Rao, though styled asMediators/Arbitrators, are without doubt escrow agents who have beenappointed to keep certain vital documents in escrow, and to ensure asuccessful completion of the transaction contained in the MOU. Indeed, H

the very fact that they have been referred to as “Mediators/Arbitrators”and as “Mediators and Arbitrators” would show that the language usedis loose – the idea really is that the two named persons do all thingsnecessary during the implementation of the transaction between theparties to see that the transaction gets successfully completed. Thisbecomes even clearer when Clauses 8 and 11 are seen minutely. Clause8 expressly declares and confirms “that for successful completion ofthis transaction in order to avoid any further unforeseen litigations”, thetwo escrow agents have been appointed. Clause 11 further makes itclear that these two gentlemen are escrow agents but shall not handovercertain documents till the total transaction is satisfactorily completed.

10. We agree with Mr. Sibal that Clause 12 has to be read in thelight of these Clauses of the MOU, and that, therefore, the expression“decision” used in Clause 12 is only a pro tem decision – namely, thatthe two escrow agents are to make decisions only during the period ofthe transaction and not thereafter. He has correctly contended that, touse a well-known latin expression, they are “functus officio” after thetransaction gets completed. Further, the “breaches” that are referred toin Clause 12 refer, inter alia, to an undertaking given by the party of thefirst part which is contained in Clause 10, which, if breached, the escrowagents have necessarily to decide on before going ahead with thetransaction. Therefore, when viewed as a whole, it is clear that the twoescrow agents are not persons who have to decide disputes that mayarise between the parties, whether before or after the transaction iscompleted, after hearing the parties and observing the principles of naturaljustice, in order to arrive at their decision. A reading of the MOU as awhole leaves no manner of doubt that the said MOU only invests thetwo gentlemen named therein with powers as escrow agents to smoothlyimplement the transaction mentioned in the MOU and not even remotelyto decide the disputes between the parties as Arbitrators.

11. This Court in P. Dasaratharama Reddy Complex (supra)referred to a large number of decisions of this Court in order to distinguishbetween clauses that were arbitration clauses and clauses that eitherled to expert determinations or were otherwise not arbitration clauses.For example, in para 17 of the judgment, the case of State of U.P. vs.Tipper Chand, (1980) 2 SCC 341 is referred to, in which this Courtheld that the Superintending Engineer was really vested with supervisionof the execution of the work and administrative control which would not AB

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Arender the clause an arbitration clause. Equally, the Court reliedextensively on K.K. Modi (supra), which again made it clear that theChairman of the IFCI, who is to decide all disputes in respect ofimplementation of the agreement and whose decision will be final andbinding, could not be construed to be an arbitration clause, inter alia, forthe reason that the clause does not invest the Chairman IFCI with quasiBjudicial powers to decide disputes between the parties, as it was only inrespect of implementation of the agreement between the parties. Para22 of the judgment is important, and sets out from K.K. Modi (supra) asto what are the valid pre-requisites for a valid arbitration agreement.

“22. One of the questions formulated by this Court was whetherCClause 9 of the memorandum of understanding constituted anarbitration agreement and whether the decision of the Chairman,IFCI constituted an award. The two-Judge Bench first culled outthe following attributes of an arbitration agreement:

“17. … (1) The arbitration agreement must contemplate that theDdecision of the tribunal will be binding on the parties to theagreement,

(2) that the jurisdiction of the tribunal to decide the rights of partiesmust derive either from the consent of the parties or from anorder of the court or from a statute, the terms of which make itEclear that the process is to be an arbitration.

(3) the agreement must contemplate that substantive rights ofparties will be determined by the agreed tribunal.

(4) that the tribunal will determine the rights of the parties in animpartial and judicial manner with the tribunal owing an equalFobligation of fairness towards both sides.

(5) that the agreement of the parties to refer their disputes to thedecision of the tribunal must be intended to be enforceable in lawand lastly, G(6) the agreement must contemplate that the tribunal will make adecision upon a dispute which is already formulated at the timewhen a reference is made to the tribunal.

18. The other factors which are relevant include, whether theagreement contemplates that the tribunal will receive evidence H

from both sides and hear their contentions or at least give theparties an opportunity to put them forward; whether the wordingof the agreement is consistent or inconsistent with the view thatthe process was intended to be an arbitration, and whether theagreement requires the tribunal to decide the dispute according tolaw.”

In the present case, it is clear that the wording of the Agreement,as has been held by us above, is clearly inconsistent with the view thatthe Agreement intended that disputes be decided by arbitration. Indeed,three of the four purchasers did not read Clause 12 as an arbitrationclause, but approached the Civil Court instead, strengthening ourconclusion that the subsequent conduct of the parties to the Agreementalso showed that they understood that Clause 12 was not an arbitrationclause in the Agreement.

12. Equally, the decision in Bihar State Mineral DevelopmentCorporation vs. Encon Builders (I) (P) Limited, (2003) 7 SCC 418was referred to, and what is important in that judgment is that a clausewhich is inserted in an Agreement for the purpose of prevention of adispute will not be an arbitration agreement. In the present case, Clause8 of the MOU makes it clear that the idea was to prevent disputes fromoccurring and to ensure smooth implementation of the Agreement, therebymaking it clear that the object was not to adjudicate disputes but toprevent them.

13. Mr. Sibal’s contention that the conduct of the appellant leavesmuch to be desired is also correct. We are of the view that havingissued a notice for arbitration way-back on 24.05.2007, there was noreason whatsoever to delay a Section 11 application for a period of twoand a half years until December, 2009. The appellant knew that Clause12 could not possibly be construed as an arbitration clause, yet somehowsought to delay the proceedings not joining his brethren in the civil suitthat was filed by them. Equally, his conduct during the pendency of theSection 11 petition leaves a lot to be desired. Even before judgment waspronounced in the Section 11 petition on 22.07.2011, the Appellantapproached another forum, namely, the Company Law Board on16.06.2011, for reliefs based upon the MOU. He, thereafter, continuedwith the Company Petition which would have led us to believe that hewas abandoning any further recourse against the judgment dated A

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A22.07.2011, but then on second thoughts, filed a Special Leave Petitionwith a delay of 358 days against the judgment rejecting his Section 11petition on 22.07.2011. During the pendency of the Special Leave Petitionas well, his conduct leaves much to be desired. On 24.01.2017, heasked that his petition that was filed before the Company Law Board bewithdrawn not with the liberty to pursue arbitration, as one would haveBexpected, but with the liberty to file a fresh company petition on thesame set of facts. All this leads us to observe that, apart from thedecision on merits, our discretionary jurisdiction under Article 136 of theConstitution also should not be exercised in favour of such a person.

14. The appeal is disposed of accordingly.C

Divya Pandey

Appeal disposed of.

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